Outsourcing is a growing phenomenon in the industry

Symptom: Some of the competitors are outsourcing their components or some of their operational functions.

Implications for the market:

• A company's cost structure depends, in part, on the approach it takes to providing the product and on the rates it pays for its basic inputs of purchases and value added. Outsourcing is an example of a different approach to the basic functions involved in providing the product. Changes in either approach or rates can have a large effect on a competitor's cost structure.

• These changes, however, can be quickly copied. The changes are so visible, and their impact on costs is so large, that competitors who are able to copy the changes do so quickly. Those who cannot are at a disadvantage because they will have lower–often substantially lower–returns.

• Another way to lower costs is through improved productivity of company resources. This can be the result of:

  • Relatively high volume. High volume competitors can spread their fixed costs, primarily SG&A, over more units.

  • Rapid growth. Competitors who grow quickly–usually in excess of 10 percent growth in units per year — cannot physically add capacity as fast as they sell units. Since cost growth lags unit growth, cost per unit declines.

  • Focus. Competitors with a strong cost focus do not expend resources on anything that does not provide a direct benefit to their specifically chosen customers.

• Productivity improvements are difficult to duplicate. High volume and rapid growth require winning customers more quickly than competitors or winning more customers, which is not easily done. Focus is the most difficult to achieve because it requires a keen understanding of customers' costs as well as an iron-fisted resolve not to add anything that customers do not value.